The United States economy is on a trajectory of continued expansion in 2026, albeit at a moderated pace compared to the robust growth witnessed in recent years. According to the latest economic forecast issued by the Indiana University Kelley School of Business, real GDP growth is projected to reach 1.8%, signaling steady but tempered advancement. A critical driver anticipated to underpin this growth is significant investment in artificial intelligence (AI) technologies and their associated energy infrastructure, a sector poised to redefine economic priorities and productivity paradigms.
Kyle Anderson, clinical assistant professor of business economics at Kelley Indianapolis, highlights AI as the defining economic phenomenon of the year ahead. He cautions, however, against an overzealous investment surge reminiscent of the dot-com bubble of the early 2000s. The inherent volatility of AI investments, intertwined with geopolitical uncertainties—especially fluctuating trade policies and tariffs—complicates business strategy and underlies a cautious yet optimistic outlook. These factors collectively present a complex landscape where emergent technologies interplay with macroeconomic variables.
Labor market dynamics in the U.S. are expected to reflect this nuanced growth environment. Job creation rates will likely be insufficient to prevent the unemployment rate from inching upward to 4.8% during the year. Corporations increasingly intent on leveraging AI aim to augment productivity and output without a corresponding rise in labor demand. This automation-driven productivity growth, while beneficial in operational efficiency, introduces competing pressures on employment levels and wage growth trajectories.
Indiana’s economic performance presents a microcosm of broader regional variations within the Midwest. Real GDP in Indiana grew by 2.6% across the latter half of 2024 through mid-2025, outpacing the national average of 2.1%. This divergence is largely attributable to the state’s pronounced strength in nondurable goods manufacturing, particularly in chemical and pharmaceutical production. These sectors are integral to the state’s economic identity and reflect a specialization that offers resilience amidst broader manufacturing challenges faced by neighboring states.
Despite this sectoral vitality in nondurables, durable goods manufacturing in Indiana, historically a stronghold reflecting its automotive and machinery legacy, is failing to keep pace with national trends. Real GDP growth in durable goods lags behind national averages, suggesting structural difficulties within these industries. Contributing factors include competitive pressures, shifts in global supply chains, and technological disruptions that have yet to fully translate into productivity gains within these traditional manufacturing hubs.
Compensatory dynamics are evident in wage trends within the manufacturing sector. Indiana workers earn, on average, 84.8% of the national average for hourly wages in manufacturing—a figure that illustrates persistent regional wage disparities. Wage growth in the state’s manufacturing sector stands at 2.6%, trailing the nationwide growth rate of 3.8%. This wage underperformance potentially stymies consumer spending power and economic growth, reflecting deeper labor market rigidities and skills mismatches.
In contrast to the broader state trends, the metropolitan area of Indianapolis is forecasted to experience relatively robust real GDP growth in the range of 1.5% to 2% in 2026. The unemployment rate in the region is expected to rise modestly from 3.6% to just above 4%, indicative of a dynamic labor market adapting to evolving economic conditions. This metropolitan economic vitality is fueled by significant capital investment projects that promise to reshape the urban landscape and economic infrastructure.
Capital influx into Indianapolis includes substantial developments such as the revitalization of Circle Center, expansion of convention facilities with the addition of a 40-story hotel, and the inauguration of a new Indiana University Health campus. Furthermore, ongoing investments by Indiana University and Purdue University in cutting-edge research facilities underpin a commitment to innovation-led growth. Corporate investments, including the completion of Elanco’s headquarters and the burgeoning One Health District, reinforce the city’s positioning as a center for entrepreneurial activity and sectoral diversification.
Notwithstanding these positive regional developments, Indianapolis faces constraints from concurrent slowdowns in logistics and manufacturing sectors—key contributors to the city’s economy. These headwinds temper the overall economic potential and highlight the nuanced balancing act between sectors within metropolitan economies. The transition towards a more knowledge and service-based economic model must thus contend with legacy industrial challenges and global economic shifts.
Financial market performance remains a pivotal element in the economic narrative for 2026. The S&P 500 index has marked three consecutive years of double-digit returns, a streak likely to continue into 2026 albeit at a moderated pace. Russell Rhoads, clinical associate professor of financial management at Kelley Indianapolis, tempers expectations given the elevated market valuations and anticipated deceleration in economic growth. The Federal Reserve’s plan to continue reducing interest rates provides supportive monetary conditions, yet fundamental economic factors necessitate cautious investor optimism.
On the international front, the global economy is poised for steady albeit decelerating growth, forecasted at 3.2% in 2025 with a slight slowdown to 3.1% in 2026. Trade conflicts, while impactful, have had less severe consequences than initially feared, though persistent uncertainty in trade policy remains a source of volatility. Elevated inflationary pressures in the U.S., projected to hover around 3%, owe in part to tariff-related cost increases offsetting disinflation from weakening demand, suggesting inflationary dynamics will remain a key variable for policymakers and markets alike.
The Indiana University Kelley School of Business continues to disseminate these insights through its comprehensive Futurecast series, engaging a broad spectrum of stakeholders across multiple cities throughout the state. The series convenes expert analysis and local perspectives to enhance understanding of global, national, and regional economic interdependencies. Detailed sectoral analyses and localized forecasts are integral to these reports, contributing to informed decision-making by public and private entities operating within Indiana’s diversified economic milieu.
The forthcoming publication of a detailed economic outlook report in the Indiana Business Review will provide an invaluable resource for academics, business leaders, and policymakers alike. Its coverage will encompass nuanced forecasts not only for the nation and state but will also delve into metropolitan areas and key economic sectors, offering a granular understanding of the challenges and opportunities shaping the regional economic environment heading into 2026.
Subject of Research: Not applicable
Article Title: IU Kelley School of Business Futurecast 2026
News Publication Date: 29-Oct-2025
Web References:
- https://kelley.iu.edu/
- https://ibrc.kelley.iu.edu/index.html
- https://news.iu.edu/live/news/47550-kelley-school-to-present-futurecast-2026-economic
- https://www.ibrc.indiana.edu/ibr/
Keywords: Economics, Economic development, Business, Industrial sectors, Pharmaceutical industry, Domestic commerce, Manufacturing industry, Economics research, Macroeconomics, Unemployment
